The Kansas Company buys 1,000 shares of Topeka Inc. on August 1, Year One, for $

Question

The Kansas Company buys 1,000 shares of Topeka Inc. on August 1, Year One, for $19 per share. Topeka paid a $1 per share cash dividend on December 12, Year One. The shares are worth $23 per share on December 31, Year One. Kansas sells this entire investment on April 7, Year Two, for $25 per share.

a. If this asset is viewed as an investment in trading securities, what is reported in the Year One

financial statements for Kansas?

b. If this asset is viewed as an investment in trading securities, what is reported in the Year Two

financial statements for Kansas?

c. If this asset is viewed as an investment in available-for-sale securities, what is reported in the Year One financial statements for Kansas?

d. If this asset is viewed as an investment in available-for-sale securities, what is reported in the Year Two financial statements for Kansas?

Explanation / Answer

a. reported balance= 23000

Amount reported in income statement:

b. year 2, carrying balnace = 0.

gain on disposal in income statement= 2000

c.

Balance sheet: 23000

Income statement: 1000

OCI:

d. Balance sheet: 0

Income statement: 6000

OCI: -4000 as unrealised holding gain is transferred from OCI to income statement

Cost of investment Number of shares a 1000 Cost per share b 19 Cost of investment c=a*b 19000 Fair value adjustment: Per share Total Fair value at year end a 23 23000 Carrying value b 19 19000 Increase/(decrease) in value c=a-b 4 4000 Add: Carrying value d 19 19000 Net carrying value at year end e=c+d 23 23000

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